Is Italy weakening the Euro?

The Euro has taken a step back on currency markets after the publication of the Italian governing agreement. Are the plans of the populist government of the Southern European country the beginning of the end for the collective coin, wonders Joost Derks of NBWM.

The value of the Euro on currency markets has shot up since the start of 2017 compared to the American dollar. An important cause of this is that the fear that other countries would follow the example of Brexit dissipated after elections in the Netherlands and France. Attention shifted to the firmly recovering European economy. This meant the Euro was able to rise 15% compared to the dollar, but this rise has ended now the plans of the new Italian government have become apparent.

Gigantic price card

In Italy the coalition was formed by two Euro-sceptical parties: the Five Star movement and Lega Nord. Both parties made a lot of promises in the run up to the elections. Lega Nord focused on pulling back a lot of the tax pressure and lowering the pension age. The five star movement advocated a basic income. The parties managed to absorb a large part of their promises in the governing agreement. There is, however, a huge price tag attached.

State debt becomes unpayable

Former IMF employee Carlo Cottarelli has worked out that the economic plans of the Italian government will cost between €109 and €126 billion. Fair dues: both parties also see space for saving. The planned savings of €0.5 billion, however, will not prevent Italy's budget deficit from shooting up. It's unavoidable that the EU standard of a maximum of 3% will be greatly exceeded. The same goes for the state debt. At the moment it is already 132% of the GDP, whilst the EU likes to see this percentage at 60% or lower.

Disagreements between Rome and Brussels

It is unavoidable that the course the Italian government is taking will lead to considerable arguments between Rome and Brussels. However, this doesn't mean Italy will blow up the EU any time soon. Despite the wild economic plans, both parties are less hostile than feared to the governing agreement. Getting rid of the Euro - which was played on in the run up to the election - is nowhere to be seen in the plans, for instance. There was also no talk of forgiving € 250 billion of the Italian state debt.

New debt crisis

The most likely scenario is that the exchange rate of the Euro will remain capricious without becoming an outright crisis. In the longer term the picture is less favourable. As soon as the interest rate in Europe goes up or tension on the financial markets increases, it will become clear that the Italian state debt is unsustainable over the long term. It could be the case that in a number of years it will show that the seeds of a new European debt crisis were being sown now.

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